Options for Refinancing Your HELOC

Here are three ways to make your monthly payments more affordable

Fact checked by Michael Logan
Reviewed by Pamela Rodriguez

If you’re looking to refinance your home equity line of credit (HELOC), a new HELOC, a home equity loan, or a new first mortgage may be a good option. These options may make sense if your HELOC is close to the end of its draw period and about to enter its repayment period. Below, we explain how these refinance options work as well as the pros and cons of each.

Key Takeaways

• Consider refinancing your HELOC to manage the repayments of your HELOC.
• You can refinance your existing HELOC with a new one, a home equity loan, or a new first mortgage.
• If you don’t qualify for refinancing, and can’t afford your new HELOC payments, ask your lender or loan servicing company about a loan modification.

1. Refinance With a New HELOC

If a lender (either your current bank or a different one) approves your application for a new home equity line of credit, you may be able to roll your existing HELOC balance into it. This essentially restarts your draw period.

Pros

Taking out a new HELOC allows you to put off those larger payments you were facing for another five or 10 years, or whatever draw period the lender agrees to. This might make sense if you are reasonably confident that you’ll be in a better financial position when the new HELOC goes into repayment mode and won’t have a problem with the new payments.

You could effectively lower your interest rate on your HELOC. For instance, you might also be able to switch from a variable-rate HELOC to one with a lower fixed-rate option, which could lower your overall borrowing costs.

You may see an increase in your home equity, especially if the value of your home increased since you signed for your first HELOC. This means you may have access to more credit, allowing you to borrow more if you need it in the future. Keep in mind, though, that you should only borrow as much as you can repay.

Cons

All you’re doing here is postponing the inevitable. At some point, you’ll need to repay your entire balance. What’s more, since interest accumulates all the while, your payments will be even higher than the ones you’ve managed to avoid.

You’ll have to pay higher fees. HELOCs typically come with closing costs and other fees, which means you’ll have out-of-pocket charges that you’ll have to pay.

2. Refinance With a Home Equity Loan

You take out a home equity loan and use it to pay off your HELOC in a lump sum. A home equity loan is like a second mortgage and allows you to borrow against the equity against your home.

Pros

A home equity loan has several potential advantages over your home equity line of credit:

• These loans typically have fixed interest rates, while HELOCs usually come with variable rates. A fixed interest rate gives you predictability for budgeting purposes as well as some protection against rising rates.
• Home equity loans often have terms (lengths) of up to 30 years, giving you a longer time to repay than a HELOC, which usually allows 20 years at most.
• You may be able to deduct the interest on home equity loans up to a certain limit for qualified expenses.

Cons

As with a new HELOC, taking out a home equity loan to repay your HELOC means that your debt will continue to grow. If you fail to repay or default completely, you could go into foreclosure and risk losing your home.

What’s more, home equity loans generally require you to make both principal and interest payments for the entire term, so you could face higher payments from the outset.

Important

Once you reach the repayment period of your HELOC, you could be in for much higher monthly payments. That’s because your new payments will consist of both principal and interest, unlike the interest-only (or interest plus a small amount of principal) payments your lender likely required during the draw period.

3. Refinance With a New First Mortgage

You take out a new mortgage to refinance both your existing first mortgage and the HELOC. One way to do this is through a cash-out refinance. With a cash-out refinance, you take out a mortgage that’s larger than your current mortgage balance, pay off that balance, and then use the remaining cash for whatever you wish. In this case that would be paying off the HELOC.

Pros

The interest rates on primary mortgages tend to be lower than those on HELOCs or home equity loans, so you could see substantial savings right there. You can opt for a mortgage with a fixed rate if you wish, and terms of up to 30 years are common.

You may also get access to a larger sum of money, especially if you have built up more equity in your home since you first purchased it. You can typically borrow up to 80% of your home’s value while some lenders may even go as high as 90%. Be sure to borrow only as much as you can so you don’t risk going into default.

Cons

Depending on the prevailing rates when you apply, you might have to accept a higher interest rate on the new mortgage than you had on your old one, making it more expensive.

In addition, closing costs on a mortgage can be substantial—often 2% to 5% of the total loan amount on top of your down payment. With a $300,000 mortgage, for example, that’s $6,000 to $15,000. Some lenders will cover your closing costs if you take out a HELOC.

Warning

HELOCs sometimes have prepayment penalties if you attempt to pay them off ahead of schedule. So it’s smart to read your loan contract or check with your lender first.

How to Qualify to Refinance Your HELOC

Whatever method you use to refinance, the lender will want to assure itself that you’re a good risk. For starters, any lender you apply to is likely to review your credit report and check your credit score:

• You’ll need a FICO score in the 700s or high 600s to qualify for a good rate. You may need a score of at least 620 to qualify at all.
• The lender will also want information on your income, which is not included in your credit report. You might have to provide pay stubs, W-2 forms, and one or more recent tax returns, among other documentation.

Based on this information and a list of your current debt payments, the lender will calculate your debt-to-income (DTI) ratio. This ratio compares your gross income to your total monthly debt obligations to make sure you aren’t getting in over your head. Many lenders like to see a DTI no higher than 36%.

Of course, the home itself also comes into the picture. Lenders typically require a new appraisal to determine its fair market value (FMV). They’ll use that to compute your combined loan-to-value (CLTV) ratio, which compares how much you owe on the home to its current value. Lenders generally prefer that your CLTV (including any new loan) not exceed 80% or 85%.

What if I Don’t Qualify to Refinance My HELOC?

If you can’t keep up with your HELOC payments and don’t qualify for new financing, one option is to contact your current lender or loan servicer and ask about a loan modification. Loan modification can take a variety of forms, making it easier for you to pay your debt and ensuring that the lender gets at least a portion of what you owe them. For example, the lender may agree to defer your payments for a time, reduce your payments by stretching them out over a longer period, lower your interest rate, or even cut the amount you owe. The time to apply for a loan modification is as soon as you realize you can’t afford your payments. Putting it off only makes the situation worse.

Can I Take Out a Personal Loan to Refinance My HELOC?

Yes, a personal loan is an option if you can get one that’s large enough to cover your HELOC balance. Personal loans are typically unsecured, so it can be difficult to obtain one with a good interest rate unless you have very strong credit, such as a FICO score in the 700s. Personal loans also have relatively short repayment terms, usually 84 months or less, so you might find that your monthly payments are even higher than with your HELOC.

What Happens if I Can’t Repay My HELOC?

Because your home serves as collateral for your HELOC, the lender could seize and sell it if you default. That’s also true for first mortgages and home equity loans. Many lenders have loan modification programs that are intended to avoid that. Bear in mind that defaulting on a loan can do long-lasting damage to your credit, so it’s worth avoiding if at all possible.

The Bottom Line

If the monthly payments on your HELOC become unmanageable, refinancing it could be your best recourse. There are ways to go about it, each with pros and cons. If you don’t qualify for a new HELOC or loan option, contact your current lender about a loan modification. It is often in the lender’s best interests, as well as yours, to modify your HELOC to make your monthly payments affordable.